Consultation on control structures in audit firms and their consequences on the audit market

Comments from ACCA to the Directorate General for Internal Market and Services of the European Commission, February 2009.

Consultation issued by the Directorate General for Internal Market and Services of the European Commission.

General Remarks

ACCA welcomes the opportunity to respond to the Directorate General for Internal Market and Services Working Paper: Consultation on Control Structures on Audit Firms and their Consequences on the Audit Market (the Consultation).

As requested in the Consultation, our comments are presented in the form of general remarks followed by answers to the questions posed in the consultation.

Audit Quality 

It is a key test that any changes proposed as a result of the Consultation should not diminish the existing effectiveness of the EU's audit markets, nor the quality of auditing.

Global Considerations 

The larger audit firms active in European capital markets are generally members of international networks that provide audit services in other important capital markets. Any changes proposed as a result of the Consultation are unlikely to achieve their objectives unless they make sense in a global context.

Catastrophic event 

We do not believe that greater market participation by non-Big Four firms would address the danger of disruption to the audit of the largest listed companies for which auditor choice is perceived as a problem. Much of the concern about audit market concentration is focussed, therefore, on the possibility that one or more of the Big Four audit firms might exit the market leaving some of the very largest companies unable to find a suitable auditor.

Given the remote chance of such a catastrophic event, we believe that one-off measures by government or regulators, if and when it occurs, are likely to be the most cost effective solution. This is preferable to early, market-wide measures that are likely to prove costly to implement, particularly for smaller listed companies.

Recent UK Experience 

The Commission will be aware of the Audit Choice Project of the UK Financial Reporting Council concerning the public interest issues that may arise from the existing competitive environment for audit services to large companies in the UK. We commend the Project to you, in particular for its relevance to identifying further catalysts to accelerating access to the international audit market.

Matters on which Specific Comments are Requested

In this section of our response we answer the specific questions posed in the Consultation.


Do you see a need for opening up the market for the audit of international companies in order to have more European wide audit service providers compared to the existing situation?

Do we need a more integrated audit market?

If yes, why?

We agree with the conclusion in the Consultation that the integration of the audit market is less than that of the capital markets. In the same way that International Financial Reporting Standards contributed to the latter, the adoption of International Standards on Auditing will promote integration. Much more could be done, however, to address member state differences in law, regulation and supervision of auditors.

The benefits of open markets within the EU are generally recognised and progress in that regard for the audit market could contribute to growth in the number of EU-wide audit service providers. Inevitably, any change to the status quo will be in response to a combination of pressures, but key factors are the desire of firms to enter the market and the attitude of those who appoint them.


Do you believe that the current number and structures of the audit firms' networks are sufficient?

The audit market currently provides auditors for the number of companies needing statutory audit. There have been some suggestions that the lack of choice of auditors, in particular for very large companies in specialised industries, such as banking, is a current concern, but in the main, for the largest listed companies, it is the future that generates most concern. If one or more of the largest auditors were to exit the audit market, there is a real prospect that a suitable independent auditor might not be available for certain very large companies.

Measures designed to increase the market penetration of the listed company audit market by firms smaller than the Big Four will not produce, in the short term, a fifth firm capable of providing audit services to the very largest companies. Nevertheless, the promotion of greater competition in the EU listed company audit market may reasonably be expected to yield benefits.


Is access to financial capital a key factor to accelerate further integration of audit firms and emergence of new players? Do you share the view that allowing for competing models (e.g. partnership model, investor model, …) will create the opportunity for more investments resulting in more global players?

Are other models conceivable?

There are undoubtedly many factors that could accelerate further integration of audit firms and promote the emergence of new players. Access to financial capital is essential to business but is deemphasised for auditing, where growth depends greatly on human capital as well as the propensity of potential clients to seek a different auditor.

There are several different forms of legal structure adopted by auditors in the EU in response to Member States' environments, including the way in which the Directive on Statutory Audit has been implemented. Access to capital is not precluded by even the simple partnership model and investor capital is available ordinarily where it is constrained to a 'minority interest'. In the UK, there are some accountancy firms whose shares are publicly traded that have relationships with independent audit firms. These 'consolidators' have achieved significant growth but are not of a size or nature to compete for the audits of the very largest listed companies.


Would models other than the current one negatively affect auditors' independence?

Is there a need for additional safeguards at European level to protect independence?

If so, what safeguards should be strengthened?

Auditor independence is both a matter of independence of thought and action and the external perception of that. Indeed, as objectivity is not capable of direct measurement, those who make use of auditors' reports rely on the perceived independence of an auditor when forming a view on the value of their report. We consider that users would be highly sceptical of claims that independence can be preserved in circumstances where there is control of the audit firm by investors.

We do not consider that further European-level safeguards, specifically to protect independence, will be necessary because, through the adoption of International Standards on Auditing, auditors will be bound, as a minimum, by the provisions of Parts A and B of the International Federation of Accountants' Code of Ethics for Professional Accountants .


Should the Commission examine other catalysts accelerating access to the international audit market?

If so, which one and why?

The Commission will be aware of the work done in the UK by the Financial Reporting Council and we commend that for further consideration. In particular, we would highlight the importance of measures designed to increase audit firms' transparency so as to better inform those ultimately responsible for the choice of auditor.


Are the current partnership forms of ownership indispensable in order to recruit, retain and further develop human capital?

Could alternative structures under revised control rules allow audit firms to retain human capital and preserve audit quality?

We do not believe that partnership forms of ownership are necessary to recruit, retain and further develop human capital. Partnership models are relatively rare in sizable businesses possessing substantial human capital. Moreover, where personal liability is not limited, that may act as a disincentive to development into a partnership role.

What is of considerable importance however is the need to maintain an appropriate 'tone at the top' of an audit firm and a shared commitment to integrity and audit quality. The partnership model has been successful in this regard in the professional environment and that may itself be a strong argument in its favour.


Is human capital a factor more important than financial capital to expand internationally?

Do you see in the current regulation for the audit profession any obstacles related to human capital preventing further integration of audit firms?

It is difficult to separate human and financial capital as both are necessary to expand internationally; neither on its own is sufficient, yet each is irrelevant unless there is potential for expansion in the value of audit clients.

Undoubtedly, differences in national legal and regulatory requirements are a barrier to further integration of audit firms. In particular, the national differences in auditor liability regimes operate to discourage integration.

Auditing is a profession where personal mobility between jurisdictions can be a significant factor in meeting demand for skilled personnel. Amelioration of regulations that make such mobility less attractive, for example contributing to the lack of portability of occupational pension provision, could also assist in achieving appropriate human capital for audit firms.

Last updated: 11 Apr 2012